The question of retail oversupply is a perennial debate for almost any city in China. We outline five ways to look at the situation if you are looking at building or investing in a shopping centre.

#1 Don’t be misled by the supply pipeline

Supply pipelines always appear to be frightening at first glance. In a typical city, the future supply schedule shows hundreds of thousands of square metres entering the market each and every year. Not all of them will be completed on time, and even fewer will be your competitor.

#2 Understanding delays

On the surface, a city’s future supply pipeline typically shows at least five or six projects due every single year for the next five years. In reality, only two or three of those will be delivered on time. That quantity becomes a lot more manageable for the market to absorb. Reasons abound for supply delays: construction complications, permits, partnership conflicts, leasing of key tenants, and even weather conditions.

#3 Submarkets matter

City-level performance figures can mask what is happening at the submarket level, making it important to dig into the local trade area of the mall in question. Only a few properties in a city are intended to serve the entire city. The rest are not your competitors. For most shopping centres, what is happening on the other side of the city is not particularly relevant.

#4 Longer-term: the peak will subside

China is currently going through its peak years for shopping centre completions. The supply peak is likely to subside as retail development becomes less attractive. And until land prices come down, rates of return will be suppressed by a weaker rental growth outlook, discouraging new project starts.

#5 Global benchmarks aren’t as informative as you might think.

It is often assumed that there is one “right” amount of mall space for a given city. This becomes an elusive question to answer. Even regional hubs within China have larger trade areas than your average city, and can support more square metres per person. Developed Asian cities may not be the right benchmarks, either. Not only are they much higher in per-capita income, places like HK and Singapore are also regional tourist destinations, supporting more retail than would otherwise be possible.

Local consumption patterns also play a role. Consumers in inland cities may have higher disposable incomes due to low housing costs and low costs of living, allowing for more mall space.

Conclusion: market forces vs local forces

The performance of a mall is ultimately more related to local factors than it is to market factors. An area is oversupplied when malls are failing. It takes a few years to make this determination and reach any meaningful conclusion. Nowadays, a slow ramp-up could be completely normal. Most of China’s most successful malls were not exactly roaring successes from the day they opened. Many malls are ultimately built ahead of demand. This means that at the time of opening, there are often still not enough nearby residents.

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